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Kuwait Strategy - Wake up to Kuwait upgrades: USD900mn in late 2018, with MSCI to follow

Kuwait EM inclusion basic Q&A

Following MSCI’s announcement last week, we thought it was worth putting together some Q&As relating to Kuwait’s index inclusion story. We are OW Kuwait and believe that FTSE’s inclusion in September and December 2018, weight bump within FM indices in May 2019, and potential for MSCI EM flows in May 2020 provide good support for a market that is under owned by foreign investors.

How significant is the index inclusion story for Kuwait? Kuwait should account for c0.4% of EM indices. We estimate that Kuwait will receive cUSD900mn inflows from FTSE trackers in September/December this year, and should the market be upgraded by MSCI, it would receive additional passive inflows of cUSD1.5bn, implying passive-only inflows of USD2.4bn by mid-2020; to put that figure in context, this is almost equivalent to the total gross foreign buying over the past three years (2015-2017). Also, there should be some additional active inflows (e.g. in 2019, we should see inflows from some FM funds similar to what we saw in 2014, when the UAE and Qatar were upgraded).

Main beneficiaries of flows? Around 90% of expected FTSE passive flows and potential MSCI flows (should Kuwait be upgraded in 2019) would go into NBK, KFH, ZAIN, and AGLTY (uncovered). Of those names, we have NBK and ZAIN in our MENA Top 20 list and our FEM picks list.

Any changes to FTSE’s indicative list this September? We expect FTSE’s indicative list of 10 names (NBK, KFH, ZAIN, AGLTY, BOUBYAN, HUMANSFT, KIB, WARBABAN, NIND, and ALIMTIAZ) to make the cut in September. We also see one potential addition in the form of BPCC KK (assuming float of c80%), which could lead to cUSD45mn inflows into the name in total (17x its ADVT during each phase).

Any other names worth a look? MEZZAN KK (which is the only liquid and investable consumer staples name in Kuwait) is one name to watch, as it passes liquidity requirements for FTSE, but is c30%+ short of making it to FTSE (within the small-cap segment); index inclusion aside, it is a name we like, and we have a Buy rating on the name, with a TP of KWD0.93 (c31% upside).

Is Kuwait well owned? There is no foreign ownership data published by the exchange. Proxy data from the IMF puts Saudi Arabia and Kuwait as the least-owned markets within EM and key Frontier markets (fig.1).

How have flows been over the past couple of years and YTD? The market has only seen sizeable net inflows in 2013-2014, when the UAE & Qatar were upgraded to EM. There was also a pick-up in net inflows in 2017 as Pakistan got upgraded. The FTSE trade is still underplayed, in our view. YTD net foreign flows are limited at only USD133mn, while GCC investors have been net Sellers (fig.2).